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Cashless Economy for Developing Countries: A Case in Indian Context

Cashless is a very ambiguous word. It can have two different meanings. One cash-free and the other, less cash. The interpretation of this word in these varied forms has a magnanimous impact when looked over at a national scale. Cash-free economy is not something that is possible. Cash forms one of the most widely used medium of payment. There are tasks where a cash-based payment is much simpler and easier than a mobile wallet or card-based payment. Activities like tipping the restaurant waiter or giving money to a beggar would be troublesome in a cash-free environment. Cash simply acts like a lubricator in our economy. Therefore, in our case study we shall consider the latter meaning for cashless. Developed countries in Europe and North America have already taken drastic measures to move towards a cashless society. Stores and transportation facilities in Sweden and Denmark have already stopped accepting cash. The developed countries have been able to bring out these massive economic changes because they have the necessary resources and support from their citizens. There is no doubt that going cashless has its own set of advantages and disadvantages, but is it the right time for the developing countries to move towards a cashless society? Recent events like demonetization in India and promotion of fin-tech services have stirred minds of people into thinking about cashless society in developing countries. Through this case we shall try to understand whether moving towards a cashless society will be beneficial for countries like India or not..............

Current Situation

The level of cash in developing countries is quite high. Majority of transactions in these countries are carried out by means of cash. Though technological advancements have taken place in these regions, majority of the population hasn’t been educated enough to use these resources for banking purposes. Exhibit I shows the comparison of three countries (India, Brazil and South Korea) on various metrics. South Korea is a developed nation while the other two are developing countries. The cash to GDP ratio is quite high in India. Even developing countries like Brazil have taken drastic steps towards cashless economy........

Savings in Developing Countries – An Indian Perspective

Indians have started to invest their money into banking instruments. An average Indian finds it easier and better to invest into banking instruments rather than going for accumulating physical assets. A survey conducted by PRICE (People’s research on India’s Consumer Economy) shows that majorly all strata of the society, that is from underdeveloped, rural to urban, prefer to invest into banking instruments, Exhibit IV.............

Network – Connectivity & Accessibility to Smartphones

Digitization in banking systems is not possible without network connectivity and accessibility to mobile devices. It has become the most important factor in fostering a digitized economy. Developing countries need to take drastic steps in implementing these technologies. At present people in these countries don’t have accessibility to a mobile phone. Many of them still rely on the age old land-line based calling system. Moreover, network connectivity is a major issue..........

Components of Money Supply

Money Supply: It is the amount of money in circulation in any economy at a given point of time. Money supply does not only includes coins, notes but also demand deposits and time deposits with banks and post offices. RBI has classified money supply as M0, M1, M2, M3 and M4 in India, where M0 is highest liquid and M4 is least liquid. Components of money supply are as follows:.........

Impact of Money Supply on Velocity of Money

As we move towards a cashless economy, the demand for holding physical cash goes down. Much of the unaccounted money or the cash kept with households is deposited in the banks. As we deposit the money in banks, the banks lend it out to other people. This causes the money to exchange more hands thereby leading to an increase in the velocity of money.........

Parallel Economy

Parallel economy can be defined as the money that is generated by activities kept secret, in the sense that these are not reported to the government authorities. So, this money is not accounted for and taxes are evaded on this money. This leads to numerous negative effects on the economy of a country such as underestimation of GDP, rise to tax evasion, diversion of resources for the purchase of real estate and luxury housing............

Cost of Transactions – PAYTM and Other Mobile Wallets

The cost associated with exchange of goods or services in an economy can be termed as cost of transaction. Whether a card-based transaction or a NEFT-based transaction, cost is incurred in both the methods. Various e-wallet applications have emerged in the past 1-2 years which are providing...........

Data Generation, Analysis and Privacy

As we turn cashless, more number of people will have bank accounts, credit cards, debit cards etc. Information regarding all of these cashless means of transactions are stored in digital formats. This data can be used by banks to analyse their customer’s spending patterns and thereby suggest appropriate schemes. It will also enable government officials to keep a check on all the improper transaction methods adopted by people............

Printing Cost of Currency

In India, the net cost of cash is 1.7% of the GDP. RBI spends around INR82,000 crores every year for printing of notes..........

Cyber Security

Cyber security is a big challenge for the authority. Cybercrime cases in the country registered under the IT Act surged nearly 300% between 2011 and 2014. According to a study, hacking, un-authorised access/attempt to access to protected computer system, breach of confidentiality/privacy are among the most severe cyber-crimes that takes place nowadays.................

Transfer of Liability from RBI to Banks

The physical cash in circulation is a liability of the central bank. The central bank provides the guarantee for these notes. In case of India, RBI takes this guarantee. As we move towards digitization and notes stop being a legal tender, all the currency will be in the form of bank deposits and the banks holding these deposits will be liable. The RBI will have no liability against these deposits. In the current scenario, the bank holds insurances up to INR1 lakh for all accounts and lockers..............

Payment for Odd Jobs

In developing countries, majority of the population earn a daily wage by doing odd jobs. Take the example of a fisherman, who goes to the sea every day for fishing and then sells it in the market the same day. He earns a daily wage on this basis. Now if people start to go cashless, he would have to accept credit cards/ debit cards, e-wallet payments etc. The financial condition of this person is such that he is somehow meeting his daily requirements............

Assignment Questions

I. How will cashless economy impact on the commercial banks and central bank?II. How being cashless will impact the economy of developing countries?III. ............

Exhibits

Exhibit I: A Comparative Study on the Use of Cash by India, Brazil and South Korea

Exhibit II: Comparative Analysis of Using Cash vis-à-vis Cards

Exhibit III: Cost of using Cash to various stakeholders

Exhibit IV: Mode of Saving in India

Exhibit V: Banking Access to Indian Citizen

Exhibit VI: Supply of Narrow and Broad Money from 2000-01 to 2016-17

Exhibit VII: Outstanding Balance of M1 and M3 as on March 31st

Teaching Note Preview

Cashless Economy for Developing Countries: A Case in Indian Context

Synopsis

In November 2016, the government of India took initiative towards cashless economy by demonetizing old currencies and promoting fin-tech companies. This case study discusses the impact of this step on the different sectors on the economy. Going cashless is a big challenge in India, considering the fact that majority of the transactions are cash based, large chunk of the population are not educated enough to use electronic payment system, still part of country faces network issues. It remains to be seen how the regulators will handle these challenges and bring the desired results.

Pedagogical Objectives

• To understand the role of financial regulators (RBI) in the economy• To understand monetary policy, fiscal policy and money supply in the financial systems• To understand the impact of cashless economy on the society

Case Positioning and Setting

The case can be used for both first year MBA students for Macro-Economics course and second year MBA for the elective course Financial Institutions & Markets to elaborate the following themes:

a) Money and Bankingb) Money Supply and Central Bank

Mandatory Reading

The concepts of Money Supply, Monetary and Fiscal policy from any Macroeconomics textbook

Assignment Questions

I. How will cashless economy impact on the commercial banks and central bank?II. How being cashless will impact the economy of developing countries?III..............

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Abstract

Over the past few years, we have seen unprecedented growth in the economies of the developing countries. With the opening up of markets, these countries have witnessed a rise in employment and productivity. Nevertheless, the scenario of the developed countries has been quite different. Many European countries have witnessed stagnant economic situations with interest rates hovering around the zero lower bound. These lower interest rates have urged Europeans to hoard cash rather than keeping it in the bank. With an urgent need to pump up inflation, these countries have adopted a strategy to move towards a cashless economy thereby rendering the hoarding of cash as illegal. A cashless economy enables the government to increase consumer spending and curb the existence of black money. Considering these benefits, many developing countries have taken measures of shifting towards a cashless economy. The government in these developing countries have increased incentives and promoted the use of digital payments but shifting to a cashless economy is going to be a major challenge. Cash-based transactions are still on a rise in developing countries and with majority of the population without a bank account, this becomes the only means for transaction. Apart from the operational challenges, there is going to be a huge impact on the framing of the monetary policy and the capability of the central bank in controlling money supply in the economy.

Pedagogical Objectives

To understand the role of financial regulators (RBI) in the economy

To understand monetary policy, fiscal policy and money supply in the financial systems

To understand the impact of cashless economy on the society

Case Positioning and Setting

This case study can be used for both first year MBA students for Macro-Economics course and second year MBA for the elective course Financial Institutions & Markets to elaborate the following themes:
a) Money and Banking
b) Money Supply and Central Bank

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